This rise in interest rates has a brutal impact on Portuguese families with mortgage loans, considering that more than 90% of them have this loan associated with a variable rate. In the case of variable rates, the increase in interest rates has led to an almost immediate increase in the value of the installment in recent months, with increases of up to double the value of the initial installment!
It could be said that the fact that most mortgages are variable rate is due to the lack of a competitive offer from the banks, but it is also certainly due to the lack of financial literacy among families.
In fact, families with lower incomes and higher mortgage loan strain rates (above 30%) should opt for a fixed-rate loan, in order to reduce their risk in the face of possible interest rate increases (which quickly puts them in a major challenge to manage the family budget and, in the end, can lead to the loss of the house due to loan default).
It's important to note that the fixed rate is generally higher than the variable rate when the loan is taken out, but on the other hand, families know what to expect in the future and can therefore better plan their finances.
In extreme cases of financial difficulty, it is important to ask for advice and approach the bank to restructure the loan (for example, by lowering the interest rate or increasing the number of years for repayment) in order to reduce the impact of the increase in the loan installment on monthly expenses. Banks also have a vested interest in making this renegotiation, as it is in their favor for a family to have a sustainable financial situation and thus avoid a default which also has significant costs for the bank.
What is the state of financial literacy in Portugal? International studies show that financial literacy levels are low. For example, a study by Klapper and Lusardi (2019) found that Portugal has the worst financial literacy index in the eurozone. This evidence indicates the need for targeted interventions adapted to the specific needs of each target audience (Lusardi, 2019) in order to positively impact financial literacy levels.
In addition, studies have emphasized the importance of continuous programs, rather than sporadic interventions. It is also important to identify the priority groups where the impact of financial literacy training can have the greatest impact.
The "Digital Financial Literacy Strategy for Portugal", a joint initiative by the Bank of Portugal, the European Commission and the OECD, identifies the most vulnerable groups: young people (16-24 years old), middle-aged and elderly adults (over 55), people with low incomes and low qualifications and women. It is therefore a priority to develop financial literacy programs that target these groups.
It must be acknowledged that changing financial habits and behaviors is easier and has longer-lasting effects on younger people. The study by Brown and other authors (2016) analyzed the impact of including financial education in school curricula on the financial behaviors of young Americans.
The results of the study indicated that financial education contributes to lower levels of indebtedness and arrears. An experimental study by Frisancho (2022), in which students in Peru receive financial literacy training in secondary school, concludes that the students started to behave more responsibly financially - they save money regularly and avoid excessive debt.
In the context of adults, universities can play an important role by promoting financial literacy training and facilitating interaction between academia and society. One example is the "Finance for All" program, promoted by Nova SBE in partnership with Fidelidade and the CFA Society Portugal, which offers free training in financial literacy for those who show an interest in learning.
Under this program, more than 500 people have already received training in person or online. This program has made it possible to train people of various ages (we've had people over 70!), with different levels of qualification (40% don't have higher education) and income (around 50% belong to a household whose income is less than 1500 euros net per month), and a notable percentage of women (around 75% of trainees). The program aims to train more than 1,500 people in the 2023/2024 school year.
As with any program or public policy, it is essential to rigorously and scientifically evaluate the impact of the training on the behaviors and financial decisions made by the people targeted by the program. In this way, we can learn lessons about how to design programs at the national level that are effective (that maximize impact at the lowest possible cost).
In addition, large companies and business associations should promote financial literacy programs among their employees and associates. This can also be an effective strategy for improving financial literacy in society.
Programs aimed at companies with a large number of workers and low average salaries, such as in the retail, commerce and tourism sectors, can have a significant impact on both individuals and organizations in terms of improving productivity levels, one of the main challenges facing the Portuguese economy.